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DRAFT SHELF PROSPECTUS Dated February 07, 2011
POWER FINANCE CORPORATION LIMITED (Incorporated on July 16, 1986
under the Companies Act, 1956 as a public limited company)
Registered Office and Corporate Office: Urja Nidhi, 1,
Barakhamba Lane, Connaught Place, New Delhi 110 001, India. Tel:
+91 11 2345 6000. Fax: +91 11 2341 2545.
Compliance Officer & Company Secretary: Mr. J.S. Amitabh,
Tel: +91 11 2345 6740 Fax: +91 11 2345 6786. E-mail:
[email protected]. Website: www.pfcindia.com.
PUBLIC ISSUE BY POWER FINANCE CORPORATION LIMITED (COMPANY OR
ISSUER) OF LONG TERM INFRASTRUCTURE BONDS OF FACE VALUE OF ` 5000
EACH, IN THE NATURE OF UNSECURED, REDEEMABLE, NON-CONVERTIBLE
DEBENTURES, HAVING BENEFITS UNDER SECTION 80CCF OF THE INCOME TAX
ACT, 1961, AS AMENDED, (BONDS), UP TO ` 5,300 CRORES* (ISSUE). THE
BONDS WILL BE ISSUED AT PAR IN ONE OR MORE TRANCHES UP TO ` 5300
CRORES*, ON THE TERMS AND CONDITIONS SET OUT IN THIS SHELF
PROSPECTUS AND SEPERATE TRANCHE PROSPECTUSES FOR EACH SUCH TRANCHE.
The Issue is being made under the Securities and Exchange Board of
India (Issue and Listing of Debt Securities) Regulations, 2008
(SEBI Debt Regulations). *The Issue shall not exceed 25% of the
incremental infrastructure investment made by the Company during
Fiscal 2010
GENERAL RISKS Investors are advised to read the Risk Factors
carefully before taking an investment decision in relation to this
Issue. For taking an investment decision, investors must rely on
their own examination of the Issuer and the Issue, including the
risks involved. Specific attention of the investors is invited to
Risk Factors on page 8 .This document has not been and will not be
approved by any regulatory authority in India, including the
Securities and Exchange Board of India (SEBI), the Reserve Bank of
India (RBI), any registrar of companies or any stock exchange in
India. The Bonds are subject to a statutory lock-in for a minimum
period of five years from the Deemed Date of Allotment and no
trading market would exist or be established for the Bonds for this
period, despite the Bonds being listed.
ISSUERS ABSOLUTE RESPONSIBILITY The Issuer, having made all
reasonable inquiries, accepts responsibility for and confirms that
this Shelf Prospectus contains all information with regard to the
Issuer and the Issue, which is material in the context of this
Issue, that the information contained in this Shelf Prospectus is
true and correct in all material respects and is not misleading in
any material respect, that the opinions and intentions expressed
herein are honestly held and that there are no other material
facts, the omission of which makes this Shelf Prospectus as a whole
or any such information or the expression of any such opinions or
intentions misleading in any material respect.
CREDIT RATING CRISIL Limited (CRISIL) has, by its letter no.
SM/FSR/PFC/2010-11/1601 dated February 04, 2011 assigned a rating
of AAA/Stable to the Bonds. Further, ICRA Limited has, by its
letter no. D/RAT/2010-2011/P3/8 dated February 04, 2011, assigned a
rating of LAAA to the Bonds. These ratings are not a recommendation
to buy, sell or hold securities and investors should take their own
decision. These ratings are subject to revision or withdrawal at
any time by the assigning rating agency(ies) and should be
evaluated independently of any other ratings. For the rationale for
these ratings, see Annexure II.
PUBLIC COMMENTS The Draft Shelf Prospectus dated February 07,
2011 was filed with the Designated Stock Exchange, pursuant to the
provisions of the SEBI Debt Regulations and was open for public
comments for a period of seven Working Days, i.e., until 5 p.m. on
February 17, 2011.
LISTING The Bonds are proposed to be listed on the Bombay Stock
Exchange Limited (BSE). BSE have given its in-principle listing
approval by its letter dated []. The Designated Stock Exchange for
the Issue is BSE.
LEAD MANAGERS TO THE ISSUE REGISTRAR TO THE ISSUE DEBENTURE
TRUSTEE FOR THE BONDHOLDERS
ICICI SECURITIES LIMITED ICICI Centre, H.T. Parekh Marg,
Churchgate, Mumbai 400 020 Tel: +91 (22) 2288 2460/ 70; Fax: +91
(22) 2282 6580 Email: [email protected] Investor
Grievance Email: [email protected] Website:
www.icicisecurities.com Contact person: Mr. Mahesh Natarajan
Compliance Officer: Mr. Subir Saha
SEBI Registration No.: INM000011179
SBI CAPITAL MARKETS LIMITED 202, Maker Tower E, Cuffe Parade,
Mumbai 400 005 Tel: +91 (22) 2217 8300; Fax: +91 (22) 2218 8332
Email: [email protected] Investor Grievance Email:
[email protected] Website: www.sbicaps.com Contact
person: Mr. . Puneet Deshpande Compliance Officer: Mr. Bhaskar
Chakraborty SEBI Registration No.: INM000003531
KARVY COMPUTERSHARE PRIVATE LIMITED
Karvy House 46, Avenue 4, Street No. 1, Banjara Hills,
Hyderabad- 500 034, India Tel: +91-1600-3454001 Fax:
+91-40-23431551 Email: [email protected] Investor Grievance Email:
[]@karvy.com Website: www.karvy.com Contact Person: Murali Krishna
SEBI Registration No: INR000000221
GDA TRUSTEE & CONSULTANCY LTD. Shri Niwas Apte Road,
1202/29, Shivaji Nagar, Pune 411004 Tel: 91-20-25510401(3 lines)
Fax: 91-20-25532567 Email: [email protected] Contact Person: Mr.
Yogi
Website:[] SEBI Registration No: []
ISSUE PROGRAMME ISSUE OPENS ON ISSUE CLOSES ON
[] []
The subscription list for the Issue shall remain open for
subscription during banking hours for the period indicated above,
except that the Issue may close on such earlier date as may be
decided by the board of directors of the Company. In the event of
early closure of the subscription list of the Issue for any reason
other than full subscription for the Bonds, the Company shall
ensure that notice is provided to the prospective investors through
newspaper advertisements at least three days prior to such earlier
date of Issue closure.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
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TABLE OF CONTENTS
SECTION I -
GENERAL.....................................................................................................................................
2 DEFINITIONS AND
ABBREVIATIONS.............................................................................................................
2 CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA
AND CURRENCY OF PRESENTATON
....................................................................................................................
6 FORWARD LOOKING STATEMENTS
..........................................................................................................
8 SECTION II - RISK
FACTORS.........................................................................................................................
9 SECTION III - INTRODUCTION
...................................................................................................................
23 THE ISSUE
..........................................................................................................................................................
23 SELECTED FINANCIAL
INFORMATION.......................................................................................................
26 GENERAL
INFORMATION............................................................................................................................
36 CAPITAL
STRUCTURE...................................................................................................................................
41 OBJECTS OF THE ISSUE
................................................................................................................................
143 STATEMENT OF TAX
BENEFITS..................................................................................................................
144 SECTION IV - ABOUT THE COMPANY
....................................................................................................
147 INDUSTRY
OVERVIEW..................................................................................................................................
147
BUSINESS.........................................................................................................................................................
152 REGULATIONS AND POLICIES
.................................................................................................................
171 HISTORY AND CERTAIN CORPORATE
MATTERS...................................................................................
177 MANAGEMENT
..............................................................................................................................................
184 STOCK MARKET DATA FOR OUR EQUITY SHARES/DEBENTURES
.............................................. 197 FINANCIAL
INDEBTEDNESS......................................................................................................................
200 SECTION V LEGAL AND OTHER
INFORMATION.............................................................................
217 OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS
........................................................ 217 OTHER
REGULATORY AND STATUTORY
DISCLOSURES.....................................................................
222 SECTION VI ISSUE RELATED
INFORMATION...................................................................................
225 ISSUE
STRUCTURE.........................................................................................................................................
225 TERMS OF THE
ISSUE....................................................................................................................................
228 PROCEDURE FOR
APPLICATION.................................................................................................................
248 SECTION VII - MAIN PROVISIONS OF ARTICLES OF ASSOCIATION OF THE
COMPANY ...... 257 SECTION VIII OTHER
INFORMATION.................................................................................................
274 MATERIAL CONTRACTS AND DOCUMENTS FOR
INSPECTION...........................................................
274
DECLARATION................................................................................................................................................
276 Annexures Annexure I.........FINANCIAL STATEMENTS
Annexure IICREDIT RATINGS
Annexure IIISTOCK MARKET DATA FOR DEBENTURES
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SECTION I - GENERAL
DEFINITIONS AND ABBREVIATIONS This Draft Shelf Prospectus uses
certain definitions and abbreviations which, unless the context
indicates or implies otherwise, have the meaning as provided below.
References to statutes, rules, regulations, guidelines and policies
will be deemed to include all amendments and modifications notified
thereto.
Company Related Terms
Term Description
Issuer, PFC, our Company, or the Company, or the Corporation
Power Finance Corporation Limited, a public limited company
incorporated under the Companies Act, 1956.
We, or us, our or Group
Power Finance Corporation Limited and its Subsidiaries, PFC
Consulting Ltd., Chhattisgarh Surguja Power Ltd., Coastal Karnataka
Power Limited, Coastal Maharashtra Mega Power Limited, Orissa
Integrated Power Limited, CoastalTamil Nadu Power Limited,
Sakhigopal Integrated Power Company Limited,Ghogarpalli Integrated
Power Company Limited, Tatiya Andhra Mega PowerLtd., Jabalpur
Transmission Company Limited, Bhopal Dhule Transmission Company
Limited.
Articles/ Articles of Association/AoA Articles of Association of
our Company BDTCL Bhopal Dhule Transmission Company Limited PFCCL
PFC Consulting Limited Board/ Board of Directors Board of Directors
of our Company Equity Shares Equity Shares of our Company of face
value ` 10 each JTCL Jabalpur Transmission Company Limited
Memorandum/Memorandum of Association/MoA Memorandum of Association
of our Company
Registered Office and Corporate Office
The registered office and corporate office of our Company,
situated at Urjanidhi, 1, Barakhamba Lane, Connaught Place, New
Delhi- 110 001
RoC Registrar of Companies, National Capital Territory of Delhi
and Haryana Statutory Auditors/Auditors Raj Har Gopal & Co.,
Mehra Goel & C0., the statutory auditors of our
CompanySubsidiaries PFC Consulting Ltd., Chhattisgarh Surguja Power
Ltd., Coastal Karnataka
Power Limited, Coastal Maharashtra Mega Power Limited, Orissa
Integrated Power Limited, Coastal Tamil Nadu Power Limited,
Sakhigopal Integrated Power Company Limited, Ghogarpalli Integrated
Power Company Limited, Tatiya Andhra Mega Power Ltd., Jabalpur
Transmission Company Limited, Bhopal Dhule Transmission Company
Limited.
Issue Related Terms
Term Description
Allotment/ Allot/ Allotted The Issue and allotment of the Bonds
to the successful Applicants, pursuant to the Issue.
Allottee A successful Applicant to whom the Bonds are allotted
pursuant to the Issue Applicant
A Resident Individual or an HUF who applies for issuance of
Bonds pursuant to the terms of the prospectus and Application
Form
Application Amount The aggregate value of the Bonds applied for,
as indicated in the Application Form
Application Form
The form in terms of which the Applicant shall make an offer to
subscribe to the Bonds and which will be considered as the
application for Allotment of Bonds in terms of the prospectus
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Application Interest Interest paid on application money in a
manner as more particularly detailed in Terms of the Issue on page
249
Banker(s) to the Issue/ Escrow Collection Bank(s)
The banks which are clearing members and registered with SEBI
with whom the Escrow Account will be opened and in this case being
[]
Bond Certificate(s) Certificate issued to the Bondholder(s)
pursuant to Allotment Bondholder(s)
Any person holding the Bonds and whose name appears on the
beneficial owners list provided by the Depositories or whose name
appears in the Register of Bondholders maintained by the Issuer
Bonds
Long term infrastructure bonds, in the nature of unsecured,
redeemable, non- convertible debentures of the Company of face
value of ` [*] each, having benefits under section 80CCF of the
Income Tax Act
BSE Bombay Stock Exchange Limited Buyback Amount
The amount specified as buyback amount for the Bonds under Terms
of the Issue on page 249
Term Description Buyback Date [] Buyback Intimation Period []
Consolidated Bond Certificate In case of rematerialized Bonds held
in physical form, the certificate
issued by the Issuer to the Bondholder for the aggregate amount
of the Bonds that are rematerialized and held by such
Bondholder
CRISIL CRISIL Limited Debenture Trust Deed Trust deed to be
entered into between the Debenture Trustee and the
Company, within three months from the Deemed Date of Allotment
Debenture Trustee/ Trustee Trustee for the Bondholders in this case
being GDA Trustee & Consultancy Ltd.
Deemed Date of Allotment The Deemed Date of Allotment shall be
the date as may be determined
by the Board of the Company and notified to the Designated Stock
Exchange Designated Date The date on which Application Amounts are
transferred from the
Escrow Account to the Public Issue Account or the Refund
Account, as appropriate, following which the Board of Directors
shall Allot the Bonds to the successful Applicants, provided that
the sums received in respect of the Issue will be kept in the
Escrow Account up to this date
Designated Stock Exchange BSE Draft Shelf Prospectus This draft
shelf prospectus dated February 07, 2011 filed by the Company
with the Designated Stock Exchange in accordance with the
provisions of SEBI Debt Regulations for public comments
Escrow Account Account opened with the Escrow Collection Bank(s)
and in whose favour the Applicants will issue cheques or drafts or
remit the funds electronically, in respect of the Application
Amount when submitting an Application
Escrow Agreement Agreement to be entered into by the Company,
the Registrar to the Issue, the Lead Managers and the Escrow
Collection Bank(s) for collection of the Application Amounts and
where applicable, refunds of the amounts collected from the
Applicants on the terms and conditions thereof
I-Sec ICICI Securities Limited ICRA ICRA Limited Issue Public
issue of the Bonds, in one or more tranches, for an amount up
to
`5300 crore, subject to not exceeding 25% of the incremental
infrastructure investment made by the Company in Fiscal 2010
Issue Closing Date [] Issue Opening Date [] Issue Period The
period between the Issue Opening Date and the Issue Closing Date
inclusive
of both days, during which prospective Applicants may submit
their Application Forms
Lead Managers ICICI Securities Limited and SBI Capital Markets
Limited Lock-in Period Five years from the Deemed Date of Allotment
Market Lot One Bond Notification Notification No.
77/2010/F.No.178/31/2010-SO(ITA-1) dated October 11,
2010 issued by the Central Board of Direct Taxes, MoF
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NSE National Stock Exchange of India Limited Public Issue
Account An account opened with the Banker(s) to the Issue to
receive monies from
the Escrow Accounts for the Issue on the Designated Date Record
Date Date falling [] days prior to the date on which interest or
the Maturity
Amount is due and payable Refund Account The account opened with
the Refund Bank(s), from which refunds, if any, of the
whole or part of the Application Amount shall be made Refund
Bank [] Refund Interest Interest paid on Application Amount in a
manner as more particularly detailed in
Terms of the Issue Refund Interest on page 249
Term Description
Register of Bondholders
The register of Bondholders maintained by the Issuer in
accordance with the provisions of the Companies Act and as more
particularly detailed in Terms of the Issue Register of Bondholders
on page []
Registrar Appointment Letter
Appointment letter dated [*] issued by the Company to the
Registrar to the Issue, under the terms of which the Registrar has
agreed to act as the Registrar to the Issue
Registrar to the Issue or Registrar Karvy Computershare Private
Limited
Resident Individual An individual who is a person resident in
India as defined under the Foreign Exchange Management Act,
1999
SBI Caps SBI Capital Markets Limited Series 1 Bonds The ` [*],
[] percent, non-cumulative Bonds due [] Series 2 Bonds The ` [*],
[] percent, cumulative Bonds due []
Series 3 Bonds The ` [*], [] percent, non-cumulative Bonds due
[], with buyback facility
after expiry of the Lock-in Period
Series 4 Bonds The ` [*], [] percent, cumulative Bonds due [],
with buyback facility after
expiry of the Lock-in Period Stock Exchanges BSE Trading Lot One
Bond
Working Days
All days excluding Saturdays, Sundays or a public holiday in
India or at any other payment centre notified in terms of the
Negotiable Instruments Act, 1881
Conventional and General Terms or Abbreviations
Term/Abbreviation Description/ Full Form
Act/ Companies Act Companies Act, 1956 ADB Asian Development
Bank AGM Annual General Meeting AS Accounting Standards as notified
under Companies Act BSE Bombay Stock Exchange Limited NSE NNational
Stock Exchange of India Limited CDSL Central Depository Services
(India) Limited DoEA Department of Economic Affairs, Ministry of
Finance, Government of India DoFS Department of Financial Services,
Ministry of Finance, Government of India Depository(ies) CDSL and
NSDL Depositories Act Depositories Act, 1996 DP/ Depository
Participant Depository Participant as defined under the
Depositories Act, 1996
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DRR Debenture Redemption Reserve DTC Direct Tax Code FDI Foreign
Direct Investment FEMA Foreign Exchange Management Act, 1999
FII
Foreign Institutional Investor (as defined under the SEBI
(Foreign Institutional Investors) Regulations, 1995), registered
with the SEBI under applicable laws in India
FIMMDA Fixed Income Money Markets and Derivatives Association of
India Financial Year/ Fiscal/ FY Period of 12 months ended March 31
of that particular year GDP Gross Domestic Product CRAR Capital to
Risk Assets Ratio GoI or Government Government of India ICAI
Institute of Chartered Accountants of India IFRS International
Financial Reporting Standards Income Tax Act Income Tax Act,
1961
Term/Abbreviation Description/ Full Form India Republic of India
Indian GAAP Generally accepted accounting principles followed in
India IT Information technology LIBOR London Inter-Bank Offer Rate
MoF Ministry of Finance, GoI MCA Ministry of Corporate Affairs, GoI
NBFC Non Banking Finance Company, as defined under applicable RBI
guidelines NECS National Electronic Clearing System NEFT National
Electronic Fund Transfer NSDL National Securities Depository
Limited NSE National Stock Exchange of India Limited p.a. Per annum
PAN Permanent Account Number PAT Profit After Tax PFI Public
Financial Institution, as defined under Section 4A of the Companies
Act PMDO Pooled Municipal Debt Obligation PPP Public Private
Partnership RBI Reserve Bank of India ` or Rupees or Indian Rupees
The lawful currency of India RTGS Real Time Gross Settlement
SARFAESI Securitisation and Reconstruction of Financial Assets and
Enforcement of
Security Interest Act, 2002 SEBI Securities and Exchange Board
of India SEBI Act SEBI Act, 1992 SEBI Debt Regulations SEBI (Issue
and Listing of Debt Securities) Regulations, 2008
Technical and Industry Related Terms
Term/Abbreviation Description/ Full Form
Yield Ratio of interest income to the daily average of interest
earning assets
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CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA
AND CURRENCY OF PRESENTATON
Certain Conventions All references in this Draft Shelf
Prospectus to India are to the Republic of India and its
territories and possessions. Financial Data Unless stated
otherwise, the financial data in this Draft Shelf Prospectus is
derived from (i) our audited standalone financial statements,
prepared in accordance with Indian GAAP and the Companies Act for
the six months ended September 30, 2010, Fiscal 2010, 2009, 2008,
2007 and 2006; and/or (ii) our consolidated financial statements,
prepared in accordance with Indian GAAP and the Companies Act for
the Fiscal 2010, 2009, 2008 and the six months ended September 30,
2010. In this Draft Shelf Prospectus, any discrepancies in any
table between the total and the sums of the amounts listed are due
to rounding off. All decimals have been rounded off to one decimal
point. The current financial year of the Company commences on April
1 and ends on March 31 of the next year, so all references to
particular financial year, fiscal year and Fiscal or FY, unless
stated otherwise, are to the 12 months period ended on March 31 of
that year. The degree to which the Indian GAAP financial statements
included in this Draft Shelf Prospectus will provide meaningful
information is entirely dependent on the readers level of
familiarity with Indian accounting practices. Any reliance by
persons not familiar with Indian accounting practices on the
financial disclosures presented in this Draft Shelf Prospectus
should accordingly be limited. Currency and Unit of Presentation In
this Draft Shelf Prospectus, references to Rs., Indian Rupees, INR
and Rupees are to the legal currency of India and references to
US$, USD, and U.S. dollars are to the legal currency of the United
States of America, references to Euro and are to the legal currency
of the European Union and references to Yen and JPY are to the
legal currency of Japan. Industry and Market Data Any industry and
market data used in this Draft Shelf Prospectus consists of
estimates based on data reports compiled by government bodies,
professional organizations and analysts, data from other external
sources and knowledge of the markets in which we compete. These
publications generally state that the information contained therein
has been obtained from publicly available documents from various
sources believed to be reliable but it has not been independently
verified by us or its accuracy and completeness is not guaranteed
and its reliability cannot be assured. Although we believe the
industry and market data used in this Draft Shelf Prospectus is
reliable, it has not been independently verified by us. The data
used in these sources may have been reclassified by us for purposes
of presentation. Data from these sources may also not be
comparable. The extent to which the industry and market data is
presented in this Draft Shelf Prospectus is meaningful depends on
the readers familiarity with and understanding of the methodologies
used in compiling such data. There are no standard data gathering
methodologies in the industry in which we conduct our business and
methodologies and assumptions may vary widely among different
market and industry sources. Exchange Rates The exchange rates (in
Rs) of the US$, JPY and as for last five years and September 30,
2010 are provided below:
Source: SBI TT Selling rates
Currency 31-Mar-2006 31-Mar-2007 31-Mar-2008 31-Mar-2009
31-Mar-2010 30-Sep-2010 USD 44.86 43.77 40.11 51.45 45.58 45.35 JPY
0.383 0.3724 0.4029 0.5265 0.4900 0.5440 Euro 54.73 58.34 63.47
68.43 61.31 61.79
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FORWARD LOOKING STATEMENTS
Certain statements contained in this Draft Shelf Prospectus that
are not statements of historical fact constitute forward-looking
statements. Investors can generally identify forward-looking
statements by terminology such as aim, anticipate, believe,
continue, could, estimate, expect, intend, may, objective, plan,
potential, project, pursue, shall, seek, should, will, would, or
other words or phrases of similar import. Similarly, statements
that describe our strategies, objectives, plans or goals are also
forward-looking statements. All statements regarding our expected
financial conditions, results of operations, business plans and
prospects are forward-looking statements. These forward-looking
statements include statements as to our business strategy, revenue
and profitability, new business and other matters discussed in this
Draft Shelf Prospectus that are not historical facts. All
forward-looking statements are subject to risks, uncertainties and
assumptions about us that could cause actual results to differ
materially from those contemplated by the relevant forward-looking
statement. Important factors that could cause actual results to
differ materially from our expectations include, among others:
growth prospects of the Indian infrastructure sector and related
policy developments; general, political, economic, social and
business conditions in Indian and other global markets; our ability
to successfully implement our strategy, growth and expansion plans;
competition in the Indian and international markets; availability
of adequate debt and equity financing at reasonable terms;
performance of the Indian debt and equity markets; changes in laws
and regulations applicable to companies in India, including foreign
exchange control regulations in
India; and other factors discussed in this Draft Shelf
Prospectus, including under Risk Factor on page [].
Additional factors that could cause actual results, performance
or achievements to differ materially include, but are not limited
to, those discussed under Business on page []. The forward-looking
statements contained in this Draft Shelf Prospectus are based on
the beliefs of management, as well as the assumptions made by, and
information currently available to, management. Although we believe
that the expectations reflected in such forward-looking statements
are reasonable at this time, we cannot assure investors that such
expectations will prove to be correct. Given these uncertainties,
investors are cautioned not to place undue reliance on such
forward-looking statements. If any of these risks and uncertainties
materialize, or if any of our underlying assumptions prove to be
incorrect, our actual results of operations or financial condition
could differ materially from that described herein as anticipated,
believed, estimated or expected. All subsequent forward-looking
statements attributable to us are expressly qualified in their
entirety by reference to these cautionary statements.
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SECTION II - RISK FACTORS
You should carefully consider all the information in this Draft
Shelf Prospectus, including the risks and uncertainties described
below, and under Business on page [] and Financial Statements,
before making an investment in the Bonds. The risks and
uncertainties described in this section are not the only risks that
we currently face. Additional risks and uncertainties not known to
us or that we currently believe to be immaterial may also have an
adverse effect on our business, prospects, results of operations
and financial condition. If any of the following or any other risks
actually occur, our business, prospects, results of operations and
financial condition could be adversely affected and the price of,
and the value of your investment in the Bonds could decline and you
may lose all or part of your investment.
The financial and other related implications of risks concerned,
wherever quantifiable, have been disclosed in the risk factors
mentioned below. However, there are certain risk factors where the
effect is not quantifiable and hence has not been disclosed in such
risk factors. The numbering of risk factors has been done to
facilitate ease of reading and reference, and does not in any
manner indicate the importance of one risk factor over another.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
1. We have significant exposure to certain borrowers and if
these exposures become non-performing, the quality of our asset
portfolio may be adversely affected.
We are a power sector specific public financial institution.
This sector has a limited number of borrowers and our past and
future exposure to these borrowers is anticipated to be large. In
addition, many of these borrowers are public sector utilities that
are loss making. As of September 30, 2010, our ten largest single
borrowers in the aggregate accounted for 53.19 % of our total
outstanding exposure. Any negative trends or financial difficulties
particularly among our large borrowers could increase the level of
non-performing assets in our portfolio and adversely affect our
business and financial performance. For the foreseeable future, we
expect to continue to have a significant concentration of loans to
certain borrowers. Credit losses on our significant single
borrowers and borrower group exposures could adversely affect our
business and financial performance.
2. We may not be able to recover, or there may be a delay in
recovering, the expected value from our securities and collaterals
which may affect our financial condition.
We have granted certain loans to our borrowers where partial
security has been created or disbursements have been made pending
security or loans have been granted without security. As of
September 30, 2010, out of our total loans outstanding of Rs.
87906.41 crore, Rs.53771.33 crore, or 61.17% of our outstanding
loans are secured by charges on project assets, Rs. 15385.71, or
17.50% of our outstanding loans are unsecured but have a state
government guarantee as collateral and Rs. 18749.37 crore, or
21.33% of our outstanding loans are unsecured. These unsecured
loans include Rs. 4245.74 crore or 4.82% of our outstanding loans
that have been issued to the NTPC and PGCIL. Although, legislation
has been introduced, which may strengthen the rights of creditors
for faster realization of collateral in the event of default, we
cannot guarantee that we will be able to realize the full value of
our collateral, on account of certain factors including delays due
to the fact that certain loans have been granted by us as a part of
consortium of lenders or delays in taking immediate action in
bankruptcy foreclosure proceedings, stock market downturns and
defects in the perfection of collateral and fraudulent transfers by
borrowers. Further, in the event that a specialized regulatory
agency gains jurisdiction over the borrower, actions on behalf of
the creditors may be further delayed. Any failure to recover the
expected value of collateral security could expose us to a
potential loss. In addition, the RBI has devised a corporate debt
restructuring system to put in place an institutional mechanism for
timely and transparent restructuring of corporate debt. The
applicable RBI guidelines envisage that in case of debts amounting
to Rs. 720 crore and above, lenders holding more than 75% of such
debt can decide to restructure the debt and such a decision would
be binding on the remaining lenders. In situations where other
lenders own more than 75% of the debt of a borrower, we could be
required by the other lenders to agree to restructure the debt,
regardless of our preferred method of settlement. Apart from the
applicable RBI guidelines, we may be a part of a syndicate of
lenders wherein the majority elects to pursue a different course of
action than the course of action chosen by us. Any such unexpected
loss could adversely affect our business and financial
performance.
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10
3. Our borrowers insurance of assets may not be adequate to
protect them against all potential losses to which they may be
subject, which could affect our ability to recover the loan amounts
due to us.
Under our loan agreements, where loans are extended on the basis
of charge on assets, our borrowers are required to create a charge
on their assets in our favour in the form of hypothecation or
mortgage or both. In addition, terms and conditions of the loan
agreements require our borrowers to maintain insurance against
damage caused by any disasters including floods, fires and
earthquakes or theft on their charged assets as collateral against
the loan granted by us. However, in most cases our borrowers do not
have the required insurance coverage, or they have not renewed the
insurance policies or the amount of insurance coverage may be less
than the replacement costs of all covered property and is therefore
insufficient to cover all financial losses that our borrowers may
suffer. In the event the assets charged in our favour are damaged,
it may affect our ability to recover the loan amounts due to us. 4.
We will be impacted by volatility in interest rates in our
operations, which could cause our net interest margins to
decline and adversely affect our profitability.
We will be impacted by volatility in interest rates in our
operations. Interest rates are highly sensitive due to many factors
beyond our control, including the monetary policies of the RBI,
deregulation of the financial sector in India, domestic and
international economic and political conditions and other factors.
Due to these factors, interest rates in India have historically
experienced a relatively high degree of volatility. When interest
rates decline, we are subject to greater re-pricing and prepayment
risks as borrowers take advantage of the attractive interest rate
environment. In periods of low interest rates and high competition
among lenders, borrowers may seek to reduce their borrowing cost by
asking lenders to re-price loans. If we are required to restructure
loans, it could adversely affect our profitability. If borrowers
prepay loans, the return on our capital may be impaired as any
prepayment premium we receive may not fully compensate us for the
costs of utilizing funds elsewhere. If interest rates rise we may
have greater difficulty in maintaining a low effective cost of
funds compared to our competitors, who may have access to lower
cost funds. 5. Our interest income and profitability is dependant
on the continued growth of our asset portfolio.
Our average net interest margin has increased from 3.98% in
fiscal 2009-10, to 4.13% (Annualised) for six months ending
September 30, 2010. 6. Our contingent liabilities could adversely
affect our financial condition.
As of September 30, 2010, we have contingent liabilities of Rs.
5873.68 crore including non- funded contingent exposure of Rs.
476.09 crore in the form of guarantees and Rs. 5389.19 crore in the
form of letters of comfort issued to borrowers banks in connection
with letters of credit. These contingent non-funded exposures form
8.11% of our total exposure. Other contingent liabilities are Rs.
8.40 crore, which are claims against our Company. If these
contingent liabilities were to fully materialize, our financial
condition could be adversely affected. For further details on our
contingent liabilities, see annexed Financial Statements beginning
on page [] of this Draft Shelf Prospectus. 7. If the level of
non-performing assets in our loan portfolio were to increase, our
financial condition would be adversely
affected.
As of September 30, 2010, we had gross NPAs of Rs. 14.19 crores,
which forms 0.016% of our loan assets against which we have made
provision of Rs. 7.95 crores. The provisioning has been made in
terms of prudential norms laid down internally by us. We are
currently exempt from the RBI provisioning norms. If RBI
provisioning norms were to become applicable to us our level of
non-performing assets and provisions with respect thereto could be
significantly higher. If we are not able to prevent increases in
our level of non-performing assets, our business and our future
financial performance could be adversely affected. 8. We currently
engage in foreign currency borrowing and lending and we are likely
to continue to do so in the future,
which will expose us to fluctuations in foreign exchange rates,
which could adversely affect our financial condition.
As of September 30, 2010, we had foreign currency borrowings
outstanding of US$ 541.73 million, Japanese Yen 22053.96 million
and Euro 27.63 million, the total of which was equivalent to Rs.
3827.21 crores, or 5.20% of our total borrowings. We may continue
to be involved in foreign currency borrowing and lending in the
future, which will further expose us to fluctuations in foreign
currency rates. Volatility in foreign exchange rates could
adversely affect our business and financial performance. We are
also affected by adverse movements in foreign exchange rates to the
extent they impact our borrowers
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negatively, which may in turn impact the quality of our exposure
to these borrowers. Foreign lenders may also impose conditions more
onerous than domestic lenders 9. We are involved in a number of
legal proceedings that, if determined against us, could adversely
impact our business
and financial condition.
We are involved in a number of legal proceedings that, if
determined against us, could adversely impact our business and
financial condition.
We are involved in thirteen proceedings with the Income Tax
Department that are currently before various judicial forums in
India. These cases pertain to appeals we have filed in relation to
demands raised on us by the Income Tax Department for various
assessment years. We have deposited these demands with the Income
Tax Department from time to time. However, we have also filed
appeals against the demands. The total amount claimed by us against
the Income Tax Department aggregates to Rs. 33.69 crores. If these
cases are decided against us, we will not be able to recover this
amount. However, in relation to cases pertaining to the assessment
years 2000-2001, 2001-2002, 2005-2006 and 2006-2007, the Income Tax
Department has appealed against the refunds of Rs. 50.36 crores
granted to us in relation to the aforesaid assessment years. If
these cases are decided against us, we shall have to pay these
amounts to the Income Tax Department. In addition, we have filed
two Original Applications (OA) before the Debts Recovery Tribunal,
Delhi. against Bihar State Hydroelectric Power Corporation Limited
(BSHPCL), now the matter has been referred to High Power Committee
comprising of Cabinet Secretary & others. Being aggrieved of
this BSHPCL has filed four set of appeals before Debts Recovery
Appellate Tribunal against the order of the Debts Recovery
Tribunal. The provisions for the same has already been entered in
our financials, however the outcome of the same will not affect our
financial results. A employee from the Corporation has filed a writ
petition against us. For more details please refer OUTSTANDING
LITIGATION AND MATERIAL DEVELOPMENTS on page 237. There are few
cases under Consumer Dispute Redressal Forum and few miscellaneous
cases which do not have any significant impact on the financial
position of our company. For further details, see the section
titled Outstanding Litigation and Material Developments beginning
on page 237 of this Draft Shelf Prospectus.
10. We may incur shortfalls in the advance subsidy received
under the Accelerated Generation and Supply Programme (AG&SP)
of the GoI, which may affect our financial condition.
In fiscal 1998, the GoI started the AG&SP, a scheme for
providing interest subsidies for various projects. We oversee and
operate this scheme on behalf of the GoI. The scheme subsidises our
normal lending rates on loans to state power utilities. The subsidy
is paid in advance directly to us from the central government
budget and is to be passed on to the borrowers against their
interest liability arising in future under the AG&SP. We
maintain an interest subsidy fund account on account of the subsidy
claimed from the GoI at net present value which is calculated at
certain pre-determined and indicative discount rates, irrespective
of the actual repayment schedule, moratorium period and duration of
repayment. The impact of the difference between the indicative
discount rate and period considered at the time of drawal and the
actual can be ascertained only after the end of the respective
repayment period in relation to that particular loan. There might
be instances where there is a shortfall or a surplus in the subsidy
received from the GoI. In the event of there being a shortfall, we
shall have to bear the difference, which may affect our financial
condition. 11. If we are unable to manage our growth effectively,
our business and financial results could be adversely affected.
Our business has grown since we began operations in March 1988.
From March 31, 2006 to March 31, 2010, our disbursements increased
at a compounded annual growth rate of 22%. We intend to continue to
grow our business, which could place significant demands on our
operational, credit, financial and other internal risk controls. It
may also exert pressure on the adequacy of our capitalization,
making management of asset quality increasingly important. Our
asset growth will be primarily funded by the issuance of new debt.
We may have difficulty in obtaining funding on attractive terms.
Adverse developments in the Indian credit markets, such as the
recent increase in interest rates, may significantly increase our
debt service costs and the overall cost of our funds. Any inability
to manage our growth effectively on favourable terms could have a
material adverse effect on our business and financial performance.
Because of our growth and the long gestation period for power
sector investments, our historical financial statements may not be
an accurate indicator of our future financial performance.
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12. We might not be able to develop or recover costs incurred on
our Ultra Mega Power Projects and our failure to do so
may have an adverse effect on our profitability.
We are the nodal agency on the initiative of the GoI to
facilitate development of UMPPs having a capacity of 4000 MW each
and have incorporated eleven subsidiary companies to act as Special
Purpose Vehicles (SPVs) for these projects. It is proposed to
transfer these SPVs to successful bidders, through a tariff based
international competitive bidding process, who will then implement
these projects, on payment of development costs incurred by each
company. These SPVs have been set up to facilitate the tie-up of
inputs, linkages and clearances for these projects to facilitate
development of the UMPPs. It is proposed that these SPVs shall
undertake preliminary studies and shall obtain necessary clearances
and tie-ups including water, land and power selling arrangements,
prior to award of these projects to successful bidders. We have and
are likely to continue to incur expenses in connection with these
UMPPs on account of proposed pre-feasibility studies, establishment
costs including costs on account of obtaining fuel linkages, water
supply, clearances, acquisition of land, pre-bid conferences,
advertisements and publicity. It may be possible that we are unable
to develop these UMPPs on account of various factors including
environmental problems, resistance by local residents or our
inability to find a developer. Further, there might be instances
where we may also not be able to fully recover our expenses from
the successful bidder, which may result in financial loss to us and
to that extent it would adversely affect our financial condition.
13. We may make equity investments in power sector in the future
and such investments may not be recovered.
We may make equity investments in the power sector either
directly or indirectly. As of September 30, 2010, our investments
in equity and equity linked instruments were Rs. 30.56 crores. The
value of these investments depends on the success and continued
viability of these businesses. In addition to the project-specific
risks described in the above risk factors, we have limited control
over the operations or management of these businesses. Therefore,
our ability to realize expected gains as a result of our equity
interest in a business is highly dependent on factors outside our
control. Write-offs or write-downs in respect of our equity
investments may adversely affect our financial performance. 14. The
GoI holds a majority of our Equity Shares and can therefore
determine the outcome of shareholder voting and
influence our operations.
Our principal shareholder, GoI, holding 89.78% of our Equity
Shares, exercises a significant degree of influence over us and
will be able to control the outcome of any proposal that can be
passed with a majority shareholder vote. In addition, the GoI
significantly influences our operations through its various
departments and policies. 15. We are subject to restrictive
covenants under our credit facilities that could limit our
flexibility in managing our
business.
There are restrictive covenants in the agreements we have
entered into with certain banks and financial institutions for our
short term borrowings, medium term borrowings, long term borrowings
and bonds trust deeds. These restrictive covenants require us to
maintain certain financial ratios and seek the prior permission of
these banks/financial institutions for various activities,
including, amongst others, selling, leasing, transferring or
otherwise disposing of any part of our business or revenues,
effecting any scheme of amalgamation or reconstitution,
implementing a new scheme of expansion or taking up an allied line
of business. Such restrictive covenants in our loan and bond
documents may restrict our operations or ability to expand and may
adversely affect our business. These restrictive covenants may also
affect some of the rights of our shareholders, including the
payment of the dividends in case of any default in debt to such
lenders. For details of these restrictive covenants, see the
section titled Financial Indebtedness beginning on page 219 of this
Draft Shelf Prospectus. 16. Our success depends in large part upon
our management team and skilled personnel and our ability to
attract and
retain such persons.
Our future performance depends on the continued service of our
management team and skilled personnel. We also face a continuous
challenge to recruit and retain a sufficient number of suitably
skilled personnel, particularly as we continue to grow. There is
significant competition for management and other skilled personnel
in our industry, and it may be difficult to attract and retain the
personnel we need in the future. While, we have employee friendly
policies including an incentive scheme to encourage employee
retention, the loss of key personnel may have an adverse affect on
our business, results of operations, financial condition and
ability to grow. 17. Our trademark or logo has not been registered
under the Trade Marks Act, 1999 and our failure to protect our
intellectual property rights may adversely affect our
business.
We do not have a registered trademark over our name and logo
under the Trade Marks Act, 1999 and consequently do not enjoy the
statutory protections accorded to a registered trademark. Any
failure to protect our intellectual property rights may adversely
affect our business.
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18. The power sector financing industry is becoming increasingly
competitive and our growth will depend on our ability to
compete effectively and maintain a low effective cost of
funds.
We face increasing competition from public and private sector
commercial banks in India and from other financial institutions
that provide power sector finance products or services. Many of our
competitors have greater and cheaper resources than we do.
Competition in our industry depends on, among other things, the
ongoing evolution of government policies relating to the industry,
the entry of new participants into the industry and the extent to
which there is consolidation among banks and financial institutions
in India. Our ability to compete effectively is dependent on our
ability to maintain a low effective cost of funds. Our borrowing
costs have been competitive in the past initially due to the
sizeable equity contribution by the GoI as a 100% owner, the
availability of tax-free bonds, SLR bonds and loans guaranteed by
the GoI and subsequently as a result of our strong credit ratings.
With the growth of our business, we are increasingly reliant on
funding from the debt capital markets and commercial borrowings.
The market for such funds is competitive and our ability to obtain
funds on acceptable terms will depend on various factors including
our ability to maintain our credit ratings. If we are unable to
access funds at an effective cost that is comparable to or lower
than our competitors, we may not be able to offer competitive
interest rates to our borrowers, which could adversely affect our
business growth. 19. Power projects carry certain risks, which to
the extent they materialize could adversely affect our business
and
financial performance.
Our business mainly consists of lending to and providing
advisory services to power sector projects in India. Power sector
projects carry project-specific as well as general risks. These
risks are generally out of our control and include:
political, regulatory, fiscal, monetary, legal actions and
policies that may adversely affect the viability of projects to
which we lend;
changes in government and regulatory policies relating to the
power sector;
delays in the construction and operation of projects to which we
lend;
adverse changes in demand for, or the price of, power generated
or distributed by the projects to which we lend;
the willingness and ability of consumers to pay for the power
produced by projects to which we lend;
shortages of, or adverse price developments for, raw materials
and key inputs for power production such as coal and natural
gas;
increased project costs due to environmental challenges and
changes in environmental regulations;
potential defaults under financing arrangements of project
companies and their equity investors;
failure of co-lenders with us under consortium lending
arrangements to perform on their contractual obligations;
failure of third parties such as contractors, fuel suppliers,
sub-contractors and others to perform on their contractual
obligations in respect of projects to which we lend;
adverse developments in the overall economic environment in
India;
adverse fluctuations in interest rates or currency exchange
rates; and
economic, political and social instability or occurrences such
as natural disasters, armed conflict and terrorist attacks,
particularly where projects are located or in the markets they are
intended to serve.
To the extent these or other risks relating to the power
projects we finance materialize, the quality of our asset portfolio
and our profitability may be adversely affected. 20. Negative
trends in the Indian power sector or the Indian economy could
adversely affect our business and financial
performance.
We were founded with the objective of extending finance to and
promoting Indian power projects and related activities. For the
foreseeable future, we expect to continue to be a sector specific
public financial institution with a focus on the Indian power
sector. Any negative trend or financial difficulty in the Indian
power sector could adversely affect our business and financial
performance. We believe that the further development of Indias
power sector is dependent on regulatory framework, policies and
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procedures that facilitate and encourage private and public
sector investment in the power sector. Many of these policies are
evolving and their success will depend on whether they properly
address the issues faced and are effectively implemented.
Additionally, these policies will need continued support from
stable and experienced regulatory regimes throughout India that not
only stimulate and encourage the continued movement of capital into
power development, but also lead to increased competition,
appropriate allocation of risk, transparency and more efficient
power supply and demand management to the end consumer. The
allocation of capital and the continued growth of the power sector
are also linked to the continued growth of the Indian economy.
Since much of the power supply in India has historically been
provided by the central and state governments at a relatively low
charge to consumers, the growth of the power industry will be
impacted by consumers income levels and the extent to which they
would be willing to pay or can be induced to pay for power. If the
central and state governments initiatives and regulations in the
power sector do not proceed to improve the power sector as intended
or if there is any downturn in the macroeconomic environment in
India or in the power sector, our business and financial
performance and the price of our Equity Shares could be adversely
affected. 21. Material changes in the regulations that govern us
and our borrowers could cause our business to suffer.
We are regulated by the Companies Act and some of our activities
are subject to supervision and regulation by statutory authorities
including the MoF, RBI, SEBI and Stock Exchanges. Additionally, our
borrowers in the power sector are subject to supervision and
regulation by the CERC and SERC. See the section titled Regulations
and Policies in India beginning on page [] of this Draft Shelf
Prospectus. Further, we are subject to changes in Indian law, as
well as to changes in regulation and government policies and
accounting principles. We also receive certain benefits and take
advantage of certain exemptions available to our classification as
a public financial institution under section 4A the Companies Act
and as a NBFC under the RBI Act, 1934. The laws and regulations
governing us could change in the future and any such changes could
adversely affect our business, our future financial performance and
the price of our Equity Shares, by requiring a restructuring of our
activities, which may impact our results of operations. 22. We have
certain cash credit facilities which can be recalled by our lenders
at any time that may affect our financial
condition adversely.
We have certain cash credit facilities amounting to Rs. 1350
crores as on 30th September, 2010 which can be recalled by our
respective lenders at any time. In the event any of our lenders
recall the cash credit facilities, we may face adverse liquidity
problems and our financial condition may get affected to the extent
of the financial assistance recalled.
23. We are in process of executing a perpetual lease deed for
our registered office premises and consequently do not have title
to the premises at present.
In accordance with the Memorandum of Agreement dated February 5,
2002 entered into with NDMC, we were required to execute a
perpetual lease deed with the NDMC after completion of construction
of the building where our registered office is located. We are
currently awaiting execution of the same, as a result of which, we
presently do not hold title to the premises where our registered
office is situated.
24. Our business and our industry are dependent on the policies
and support of the Government of India which makes us susceptible
to changes to such policies and the level of support we
receive.
We are a GoI undertaking operating in a regulated industry. Our
business and our industry are dependent, directly and indirectly,
on the policies and support of the GoI in many significant ways,
including with respect to the cost of our capital, the financial
strength of our borrowers, the management and growth of our
business and our industry and our overall profitability.
Historically, we have been able to reduce our cost of capital and
reliance on commercial borrowings because of various forms of
assistance received from GoI. Currently, we receive tax concessions
with respect to certain types of our bonds that enable us to price
such bonds at a lower rate of interest than would otherwise be
available to us. We also benefit from direct tax benefits provided
by the GoI.
The GoI also impacts the nature of our business in a number of
ways. In particular, the GoI establishes the schemes in which we
and our borrowers participate. Like any other public sector
undertaking, the GoI can also influence or determine key decisions
about our Company, including with respect to dividends and the
appointment of members of our Board.
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15
Additionally, the GoI may implement policies that are
inconsistent with our business objectives. For example, although we
intend to continue to diversify our asset portfolio and continue to
increase generation-related lending activity, our lending capacity
is not unlimited and the GoI could seek refocus of our lending
capacity on transmission and distribution projects or rural
areas.
Our borrowers are also significantly impacted by the policies
and support of the GoI in a variety of ways, as the GoI regulates
the industry in which our borrowers operate. For example, the GoI
has established a number of schemes and provides incentives that
provide benefits to power projects that have enhanced the financial
viability of the projects and the financial position of our
borrowers. Additionally, the GoI has in the past assisted us in
procuring the repayment of our loans from our borrowers.
Furthermore, the growth of our business is dependent upon the
continued growth of the power sector and the overall Indian
economy, which are significantly impacted by the policies of the
GoI. Changes in the policies of, or in the level of direct or
indirect support to us provided by, the GoI in these or other areas
could have a material adverse effect on our business, financial
condition and results of operations.
25. Our ability to borrow from various banks may be restricted
by changes in guidelines issued by the RBI imposing restrictions on
banks in relation to their exposure on NBFCs, including us, that
may adversely affect our growth and margins.
The RBI regulates on a continuous basis, the permitted exposure
(both lending and investment, including off balance sheet
exposures) that banks may hold with respect to NBFCs such as
ourselves. Accordingly, banks may assume exposure limits of up to
15% of the bank's capital funds as per its last audited balance
sheet for a NBFC engaged in businesses similar to our Company,
provided the exposure in excess of 10%, is on account of funds
on-lent by the NBFC to the infrastructure sector.
Presently, the ceiling on bank credit-linked to Net Owned Fund
of NBFCs has been withdrawn in respect of all NBFCs registered with
the RBI and engaged in principal business of loan and investment
activities, among others. Accordingly, banks may extend need based
working capital facilities as well as term loans to all such
NBFCs.
Furthermore, the RBI has suggested that banks consider fixing
internal limits for their aggregate exposure to all NBFCs and may
formulate suitable loan policies with the approval of their boards
of directors within the prudential guidelines and exposure norms
prescribed by the RBI to extend various kinds of credit facilities
to NBFCs subject to certain conditions.
Although we do not believe such exposure limits has had any
adverse effects on our own liquidity, we believe that individual
lenders from whom we currently borrow may not be able to continue
to provide us funds.
As we grow our business and increase our borrowings we may face
similar limitations with other lenders, which could impair our
growth and interest margins and could therefore have a material
adverse effect on our business, financial condition and results of
operations.
26. We may fail to obtain certain regulatory approvals in the
ordinary course of our business in a timely manner or at all, or to
comply with the terms and conditions of our existing regulatory
approvals and licenses which may have a material adverse effect on
the continuity of our business and may impede our effective
operations in the future.
We require certain regulatory approvals, sanctions, licenses,
registrations and permissions (collectively, approvals) for
operating our businesses. We may not receive or be able to renew
such approvals in the time frames anticipated by us or at all,
which could adversely affect our business. If we do not receive,
renew or maintain the regulatory approvals required to operate our
business it may have a material adverse effect on the continuity of
our business and may impede our effective operations in the future.
Additionally, any historical or future failure to comply with the
terms and conditions of our existing regulatory or statutory
approvals may cause us to lose or become unable to renew such
approvals. For further details, see the section titled Other
Regulatory and Statutory Disclosures on page 243 of the Draft Shelf
Prospectus.
27. We are subject to stringent labour laws, thus making it
difficult for us to maintain flexible human resource policies,
which could have an adverse affect on our business, financial
condition and results of operations.
India has stringent labour legislation that protects the
interests of workers, including legislation that sets forth
detailed procedures for employee removal and dispute resolution and
imposes financial obligations on employers upon employee
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layoffs. This makes it difficult for us to maintain flexible
human resource policies, discharge employees or downsize, which
though not quantifiable, may adversely affect our business and
profitability.
28. Some of the properties taken on lease by us may have certain
irregularities in title, as a result of which our operations may be
impaired.
We have taken on lease properties for the purposes of our branch
offices and for residential purposes for our employees. Certain of
these properties may not have been constructed or developed in
accordance with local planning and building laws and other
statutory requirements. In addition, there may be certain
irregularities in title in relation to some of our owned/leased
properties. For example, some of the agreements for such
arrangements may not have been duly executed and/or adequately
stamped or registered in the land records of the local authorities
or the lease deeds have expired and have not yet been renewed. Our
business may be adversely affected if we are unable to continue to
utilize these properties as a result of any irregularity of title
or otherwise.
29. We have not entered into any definitive arrangements to
utilise the Net Proceeds towards the object of this Issue.
We intend to utilize the Net Proceeds to augment our capital
base to meet the future capital requirements arising out of growth
in our assets, primarily our loan and investment portfolio due to
the growth of the Indian economy and the Indian power sector. Our
Company has not entered into any definitive agreements for
utilization of the Net Proceeds towards the object of this Issue.
For further details in this regard, see the section titled Objects
of the Issue on page 155 of the Draft Shelf Prospectus.
30. We may become liable for the acts or omissions of external
consultants engaged by PFC Consulting Limited (PFCCL).
Our Companys wholly-owned subsidiary, PFCCL, provides
consultancy services and may undertake execution and valuation of
projects in the power distribution sector on behalf of its clients.
For these purposes, PFCCL employs external consultants. In the
event that any acts or omissions of these external consultants
result in professional negligence or breach of contract, we could
become liable to our clients or third parties for the acts or
omissions of such external consultants which could have an adverse
affect on our business, financial condition and results of
operations.
31. Any Cross Default of financial indebtedness would trigger
payment to all other borrowings made by the corporation thereby
adversely affecting the liquidity position of the Company
PFC has given cross default covenant in few of its borrowings
which means that if the company defaults in any of its obligation
under its loan, the loan which has the cross default clause will
also become payable even if there is no breach of covenant or
default of payment on this loan. The risk may have impact on the
liquidity in case of happening of such event.
32. Volatility in Foreign Exchange and unhedged foreign currency
could adversely affect our financial conditions and results of
operations and prices of our equity shares
The Company has put in place Currency Risk Management (CRM)
policy to manage risks associated with foreign currency borrowings.
The Company enters into hedging transactions to cover exchange rate
and interest rate risk through various instruments like currency
forward, option, principal swap, interest rate swap and forward
rate agreements.
PFC currently engaged in borrowing from the foreign market in
foreign currency. The enhanced level of borrowing will expose PFC
to fluctuations in foreign exchange rates which may have adverse
effects on financial results of the corporation. As on 30th
September, 2010 PFCs outstanding foreign currency borrowing is 5. %
approx. Although PFC has in place currency risk management policy
to manage risk associated with foreign currency borrowing but there
is no assurance that it will remain effective over a period of
time. We expect PFC may be exposed to fluctuations in foreign
currency rates with the increased foreign currency borrowings.
Volatility in foreign exchange could adversely affect our financial
conditions.
As on 30th September, 2010, PFC had entered into hedging
transaction or lent on back-to-back basis to cover 12% of its
foreign currency principal exposure.
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33. Significant differences exist between Indian GAAP and IFRS
which may be material to investors assessment of our financial
condition.
Significant differences exist between the present accounting
standards and IFRS which could have a material effect on the
financial results of the company. The Institute of Chartered
Accountants of India, the accounting body that regulates the
accounting firms in India has announced the conversion with IFRS
with a fiscal period commencing April 1st 2013 for banks and
financial institutions. As we transit to IFRS reporting we may
encounter difficulties in implementing the same, there is no
assurance that our adoption of IFRS will not adversely affect our
reported results of operations or financial condition.
34. The impact of the introduction of Direct Tax Code Bill
The Honble Finance Minister has presented the Direct Tax Code
Bill, 2010 (DTC Bill) on August 30, 2010, which is proposed to be
effective from April 1, 2012. The DTC Bill is likely to be
presented before the Indian Parliament. Accordingly, it is
currently unclear what effect the Direct Tax Code would have on the
financials of the Corporation.
35. There is a significant risk due to changes in Environment
norms being followed for the thermal power projects with the
corporations main focus for financing of thermal projects, it may
pose problems in future.
With the adoption of norms provided for the climate conservation
in line with the global parameters there may be risk for the
environmental norms being followed for the thermal power projects
which is the PFCs major focus in financing of the generation
projects. This may pose a problem in the future sanctions/
disbursements and also the timely implementation of these Power
Projects. Consequently any delay in implementation of these
projects will have adverse impact on the financials of the
Corporation.
36. As the Company adopts Information Technology the risk exists
for the possibilities of IT frauds
With the computerization of the accounting, payroll, human
resource systems and in other areas of PFC, there is every
possibility of fraud related to hacking of internal systems,
possibility of manual intervention which may lead to frauds.
RISKS RELATING TO THE INDIAN ECONOMY
We are an Indian company and all of our assets and customers are
located in India. Consequently, our financial performance will be
influenced by political, social and economic developments in India
and in particular by the policies of the GoI.
1. A slowdown in economic growth in India could adversely impact
our business.
We are dependent on prevailing economic conditions in India and
our results of operations are significantly affected by factors
influencing the Indian economy. Any slowdown in economic growth in
India could adversely affect us, including our ability to grow our
loan portfolio, the quality of our assets, and our ability to
implement our strategy.
Any slowdown in the growth or negative growth of sectors where
we have a relatively higher exposure could adversely impact our
performance. Any such slowdown could adversely affect our business,
prospects, results of operations and financial condition.
2. Significant shortages in the supply of crude oil, natural gas
or coal could adversely affect the Indian economy and the power
sector projects to which we have exposure, which could adversely
affect us.
India imports approximately 75 % of its requirements of crude
oil. Crude oil prices are volatile and are subject to a number of
factors such as the level of global production and political
factors such as war and other conflicts, particularly in the Middle
East, where a substantial proportion of the worlds oil and natural
gas reserves are located. Further, in June 2010, the GoI eliminated
subsidies on certain petroleum products, and there have been recent
media reports regarding the proposed deregulation of diesel and
liquefied petroleum gas in the near future.
Any significant increase in oil prices could affect the Indian
economy, including the power sector, and the Indian banking and
financial system. High oil prices could also add to inflationary
pressures in the Indian economy. Additionally, increases in oil
prices may have a significant impact on the power sector and
related industries in which we have substantial exposure. This
could adversely affect our business including our ability to grow,
the quality of our asset portfolio, our financial performance
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and our ability to implement our strategy.
In addition, natural gas is a significant input for power
projects. India has experienced interruptions in the availability
of natural gas, which has caused difficulties in these projects.
Continued difficulties in obtaining reliable, timely supply of
natural gas could adversely affect some of the projects we finance
and could impact the quality of our asset portfolio and our
financial performance. Prices of other key raw materials, for
example steel, coal and cement, have also risen in recent years and
if the prices of such raw materials approach levels that project
developers deem unviable, this will result in a slowdown in the
infrastructure sector and thereby reduce our business
opportunities, our financial performance and our ability to
implement our strategy. Continued shortages of fuel could adversely
affect some of the projects we finance and could impact the quality
of our asset portfolio and our financial performance.
3. Political instability or changes in the government could
delay the liberalization of the Indian economy and adversely affect
economic conditions in India generally, which could impact our
financial results and prospects.
Since 1991, successive Indian governments have pursued policies
of economic liberalization, including significantly relaxing
restrictions on the private sector. Nevertheless, the role of the
Indian central and state governments in the Indian economy as
producers, consumers and regulators has remained significant.
Although, the current government has announced policies and taken
initiatives that support the economic liberalization policies, the
rate of economic liberalization could change, and specific laws and
policies affecting banking and finance companies, foreign
investment and other matters affecting investment in our securities
could change as well. Any major change in government policies might
affect the growth of Indian economy and thereby our growth
prospects. Additionally, as economic liberalization policies have
been a major force in encouraging private funding of power sector
development, any change in these policies could have a significant
impact on power sector development, business and economic
conditions in India, which could adversely affect our business and
our future financial performance. 4. Difficulties faced by other
financial institutions or the Indian financial sector generally
could cause our business
to suffer.
We are exposed to the risks consequent to being part of the
Indian financial sector. This sector in turn may be affected by
financial difficulties and other problems faced by Indian financial
institutions. Certain Indian financial institutions have
experienced difficulties during recent years, and some co-operative
banks have also faced serious financial and liquidity difficulties.
Any major difficulty or instability experienced by the Indian
financial sector could create adverse market perception, which in
turn could adversely affect our business and financial
performance.
5. Terrorist attacks, civil unrest and other acts of violence or
war involving India and other countries could adversely affect the
financial markets and our business.
Terrorist attacks and other acts of violence or war may
negatively affect the Indian markets on which our Equity Shares
trade and also adversely affect the worldwide financial markets.
These acts may also result in a loss of business confidence, make
travel and other services more difficult and ultimately adversely
affect our business. In addition, any deterioration in relations
between India and Pakistan might result in investor concern about
stability in the region. India has also witnessed civil
disturbances in recent years and it is possible that future civil
unrest as well as other adverse social, economic and political
events in India could have a negative impact on us. Such incidents
could also create a greater perception that investment in Indian
companies involves a higher degree of risk and could have an
adverse impact on our business
6. Natural calamities could have a negative impact on the Indian
economy and cause our business to suffer.
India has experienced natural calamities such as earthquakes,
floods and drought in the recent past. The extent and severity of
these natural disasters determine their impact on the Indian
economy. In previous years, many parts of India received
significantly less than normal rainfall. As a result, the
agricultural sector recorded minimal growth. Prolonged spells of
below normal rainfall in the country or other natural calamities
could have a negative impact on the Indian economy, thereby
affecting our business, prospects, results of operation and
financial condition.
7. Any downgrading of our debt rating or Indias sovereign rating
by a credit rating agency could have a negative impact on our
business.
Any adverse revisions to our credit rating or Indias sovereign
credit ratings for domestic and international debt by credit rating
agencies may adversely impact our ability to raise additional
financing, and the interest rates and other commercial terms at
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which such additional financing is available. This could have a
material adverse effect on our business and financial performance,
our ability to obtain financing for lending operations and the
price of our Equity Shares.
8. The Indian and global financial sector is very competitive
and the ability of banks and financial institutions to grow depends
on their ability to compete effectively.
There is heavy competition among Indian public and private
sector banks, foreign banks operating in India and financial
institutions to lend to power sector. Some of these institutions
are smaller and may be more flexible and better positioned to take
advantage of market opportunities than big banks. In particular,
private banks may have operational advantages in implementing new
technologies, rationalizing branches and recruiting employees
through incentive-based compensation. Additionally, both the Indian
and global financial sector may experience further consolidation,
resulting in fewer banks and financial institutions. The GoI has
recently permitted foreign banks to set up wholly owned
subsidiaries in India. It has also allowed takeovers of Indian
banks by permitting foreign banks to acquire up to a 74 per cent
stake in an existing private bank. These developments are likely to
further increase competition and may stimulate consolidation in the
Indian financial sector. These competitive pressures affect the
Indian financial sector and our growth will depend in large part on
our ability to respond in an effective and timely manner to these
competitive pressures.
9. There may be other changes to the regulatory framework that
could adversely affect us.
The statutory and regulatory framework for the Indian power
sector has changed significantly in recent years and the impact of
these changes is yet to be seen. The Electricity Act, 2003 (the
Electricity Act) puts in place a framework for reforms in the
sector, but in many areas the details and timing are yet to be
determined. It is expected that many of these reforms will take
time to be implemented. Furthermore, there could be additional
changes in the areas of tariff and other policies, the unbundling
of the State Power Utilities, restructuring of companies in the
power sector, open access and parallel distribution, and licensing
requirements for, and tax incentives applicable to companies in the
power sector. In 2004, the GoI reviewed the Electricity Act. We
presently do not know what the nature or extent of review in future
will be, and cannot assure that such review will not have an
adverse impact on our financial condition and results of
operations. 10. Direct capital market access by our borrowers could
adversely affect us.
The Indian capital markets are developing and maturing and, as
such, there may be a shift in the pattern of power sector
financing. Financially stronger state power utilities might source
their fund requirement directly from the market. We have a large
exposure to state power utilities and such changes may have an
adverse impact on our business, financial condition and results of
our operations.
11. Recent global economic conditions have been unprecedented
and challenging and have had, and continue to have, an adverse
effect on the Indian financial markets and the Indian economy in
general, which has had, and may continue to have, a material
adverse effect on our business, financial condition and results of
operations.
Recent global market and economic conditions have been
unprecedented and challenging with tighter credit conditions and
recession in most major economies continuing into 2009.
Continued concerns about the systemic impact of potential
long-term and wide-spread recession, energy costs, geopolitical
issues, the availability and cost of credit, and the global housing
and mortgage markets have contributed to increased market
volatility and diminished expectations for western and emerging
economies. In the second half of 2008, added concerns fuelled by
the United States government conservatorship of the Federal Home
Loan Mortgage Corporation and the Federal National Mortgage
Association, the declared bankruptcy of Lehman Brothers Holdings
Inc., the United States government financial assistance to American
International Group Inc., Citigroup Inc., Bank of America and other
federal government interventions in the United States financial
system led to increased market uncertainty and instability in both
United States and international capital and credit markets. These
conditions, combined with volatile oil prices, declining business
and consumer confidence and increased unemployment, have
contributed to volatility of unprecedented levels.
As a result of these market conditions, the cost and
availability of credit has been and may continue to be adversely
affected by illiquid credit markets and wider credit spreads.
Concern about the stability of the markets generally and the
strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease to
provide credit to businesses and consumers. These factors have led
to a decrease in spending by businesses and consumers alike and
corresponding decreases in global infrastructure spending and
commodity prices. Continued turbulence in the United States and
international markets and economies and prolonged declines in
business consumer spending may adversely affect our
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liquidity and financial condition, and the liquidity and
financial condition of our customers, including our ability to
refinance maturing liabilities and access the capital markets to
meet liquidity needs.
These global market and economic conditions have had, and
continue to have, an adverse effect on the Indian financial markets
and the Indian economy in general, which may continue have a
material adverse effect on our business and our financial
performance.
RISKS RELATING TO THE BONDS
1. There has been no prior public market for the Bonds and it
may not develop in the future, and the price of the Bonds may be
volatile.
The Bonds have no established trading market. Moreover, the
Bonds are subject to statutory lock-in for a minimum period of five
years from the Deemed Date of Allotment and no trading market would
exist or be established for the Bonds for the said period despite
the Bonds being listed on BSE. Even after the expiry of the Lock-in
Period, there can be no assurance that a public market for these
Bonds would develop.
There can be no assurance that an active public market for the
Bonds will develop or be sustained. The liquidity and market prices
of the Bonds can be expected to vary with changes in market and
economic conditions, our financial condition and prospects and
other factors that generally influence market price of Bonds. Such
fluctuations may significantly affect the liquidity and market
price of the Bonds, which may trade at a discount to the price at
which you purchase the Bonds.
2. The Bonds are classified as long term infrastructure bonds
eligible for tax benefits under Section 80CCF of the Income Tax
Act, up to an amount of ` 20,000, on subscription to the Bonds. In
the event your investment in the Bonds exceeds ` 20,000 in any
assessment year, you will be eligible for benefits under Section
80CCF of the Income Tax Act only for an amount up to ` 20,000.
The Bonds are classified as long term infrastructure bonds
issued in terms of Section 80CCF of the Income Tax Act and the
notification dated October 11, 2010, issued by the MoF. In
accordance with Section 80CCF of the Income Tax Act, the amount,
not exceeding ` 20,000, paid or deposited as subscription to
long-term infrastructure bonds during the previous year relevant to
the assessment year beginning April 1, 2011 shall be deducted in
computing the taxable income of a resident individual or HUF. In
the event any Applicant applies for the Bonds in excess of `
20,000, the aforementioned tax benefit will be available to such
Applicant only to the extent of ` 20,000. Subscription to Bonds for
an additional amount or interest on the Bonds will not be eligible
for deduction from taxable income. 3. The legal regime in respect
of the issuance of long term infrastructure bonds with associated
tax benefits has been
recently introduced and its implementation and efficiency are
yet to be established. The legal regime in relation to the issuance
of long term infrastructure bonds, with associated tax benefits on
investment, was introduced in the Finance Bill of 2010. Pursuant to
a notification dated October 11, 2010, the MoF, issued terms and
conditions required for issuance of long term infrastructure bonds
by the Company. We cannot assure you that the tax benefits offered
for investment in such long term infrastructure bonds would be
continued in the future. Further, we cannot assure you that any
other company would be issuing such long term infrastructure bonds
in the future and that a market for such bonds will develop or be
sustained in the future. Further, there is no assurance as to
whether the proposed tax changes to the income tax regime pursuant
to the notification of the draft Direct Tax Code (DTC) may result
in the extinguishment of benefits available under Section 80CCF of
the Income Tax Act, thus restricting any similar issuances in the
future and affecting the public market for the Bonds.
4. There is no guarantee that the Bonds issued pursuant to this
Issue will be listed on BSE/NSE in a timely manner, or at all.
In accordance with Indian law and practice, permissions for
listing and trading of the Bonds issued pursuant to this Issue will
not be granted until after the Bonds have been issued and allotted.
Approval for listing and trading will require all relevant
documents authorising the issuing of Bonds to be submitted. There
could be a failure or delay in listing the Bonds on the BSE/NSE. 5.
You may not be able to recover, on a timely basis or at all, the
full value of the outstanding amounts and/or the interest
accrued thereon in connection with the Bonds.
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Our ability to pay interest accrued on the Bonds and/or the
principal amount outstanding from time to time i